Understanding Your Mortgage

Mortgages are a part of life, but it's important for consumers to completely understand the loans that funded their home purchases. Whether you have a 30-year fixed loan or an ARM, you should know your original balance, loan term, remaining balance and interest rate - among other factors. One of the most commonly suggested FHA home loan tips is to understand your loan before signing the paperwork. Be sure to read through the terms and conditions of your loan - and ask questions - before taking the keys to your new property.

Before taking out a home mortgage, be sure to consider these factors:

• What is the Annual Percentage Rate? Often phrased as just APR, this is a measurement that assesses the overall cost of credit. It takes into account interest and other charges issued by your lender. You often will be given an interest rate and an APR. Use both figures to compare loans - often the APR can show you that a loan has very high (or low) fees attached to it.
• Is the loan fixed or adjustable? In a fixed-rate mortgage, you will pay the same monthly payment every month for the entire term of the loan (usually 30 years, but sometimes 20 or 15 years). The interest rate stays the same for the entire length of the loan. But in an adjustable-rate mortgage, your interest rate will change over time (usually every 1, 3 or 5 years, depending on the loan). For example, if your lender suggests a "5/1 ARM" this means that your loan's interest rate will change on the fifth year, and will change every year after that. Depending on your personal financial situation and how long you plan on living in your home, one type of loan may be more advantageous for you.
• Is there a prepayment penalty? Consumers who want the ability to pay a little extra over time - which, in turn, will lower the term of their loans significantly - need to know if their loans have a prepayment penalty. Some loan programs will penalize borrowers who refinance a loan quickly, pay extra each month, or resell a home quickly. Make sure you know and understand the terms and conditions of your loan first.
• Will points help you? Your mortgage interest rate will often be higher or lower depending on how many "points" you pay in your closing costs. A point is equal to one percentage point of the principal balance of your mortgage. So if you take out a $200,000 loan, a point is $2,000. Generally, if you pay one point, your mortgage interest rate could go down. Some lenders will call them "discount points" or other terms. But be careful: Sometimes the points aren't worth the investment. Compare APRs and other costs, such as your monthly payment over time, to determine the correct combination of points - if any - that you will agree to pay.
• What is your loan term? As a rule of thumb, nearly all mortgages are based on a 30-year term. Some consumers who are able to afford a larger monthly payment select 15- or 20-year loan terms, and some lenders have begun to offer 40-year loan terms. Nearly all adjustable-rate mortgages (ARMS) are based on a 30-year loan term, with rates that adjust periodically throughout that period. Be sure you understand your loan term - and how your payments will change, if at all, throughout that period.